Consumer Group Questions Rewards Credit Cards

Rewards credit cards have always had one basic premise: the more you spend the more your rewards. This may no longer be true as it's getting mighty difficult to earn good rewards from your rewards credit cards -- or so says Choice, the consumer watchdog organisation in Australia.

Choice says rewards credit cards no longer offer as much value as before. Most rewards programs now attract higher interest rates than a few years back and fees have increased; on the other hand, the programs now impose a ceiling on the number of points you can earn and have lowered the conversion rates.

In a survey that covered 63 different rewards credit cards, the consumer watchdog calculated that to get any decent return from the rewards programs a consumer would have to spend at least $2000 monthly. And, since carrying a balance could wipe out any potential returns, this means the consumer should pay in full the amounts due each month -- or at least the same amount. That's a pretty tough order.

But what if you spent less, say only $1000 a month? The Choice study indicates that if you wanted an item worth $500, it would take you 66 months of spending -- that's right, five and a half years -- to earn enough points and get that prize.

The annual fees of the rewards credit cards included in the survey averaged $150. If you spend just $1000 a month, Choice calculates that you actually pay more in fees than you receive in rewards. The average Australian consumer spends about $1200 monthly on credit cards.

Using the average rewards credit cards, you would have to shell out $6600 (nearly six months of average spending) in order to accumulate enough points for a rewards prize worth $50. That's a return of only 0.8 per cent or 0.1 per cent a month.

The basic problem really is the consumer preference to carry a balance rather than pay off in full the balance due for the month. This tactic will attract the standard interest rate (which can reach at least 18 per cent p.a. or 1.5 per cent per month). Obviously, the value of the reward is much less than the cost of getting it.

The most effective way to maximise benefits from rewards credit cards is to pay the entire amount owing on your account each month. This allows you to enjoy the interest-free grace period given by the card companies. If paying in full is not possible, it makes more sense to drop your rewards credit cards and go for low interest credit cards instead.

Low interest credit cards, as the name implies, impose low interest rates on the outstanding balance of your account. Low interest credit cards generally attract single-digit interest rates, about 9 per cent, give or take, or about 0.75 per cent per month, and often also have very low annual fees.

In sum, rewards credit cards are great if you can afford to spend well in excess of $2000 each month and pay off everything that comes due on your credit card statement. Remember to enrol in a rewards program that best suits your needs, does not have any point caps, and has no expiry date on points.

If your spending is much less than $2000, low interest credit cards will probably give you the better deals. If you're judicious about using low interest credit cards and managing your account, you can probably afford to give yourself an appropriate reward after some time.